How does no claims bonus work?

Save money on your car insurance

Of all the ways to cut the cost of car insurance, accumulating several years’ no claims bonus (NCB) is arguably the most effective.

So if you’ve built up five or more years of claims-free motoring, you should be able to bag yourself a decent discount on the cost of cover.

As simple as this sounds in theory, in practice it can be a lot more complicated - each insurer plays by its own rules, which can cause confusion and distress if you have to make a claim or get confirmation of proof.

What is no claims bonus (NCB)?

For every year you drive without making a claim on your car insurance your insurer will give you one year's no claims bonus (NCB) that will give you a discount on the cost of cover at renewal.

These discounts are accumulated each year - the more years you drive without making a claim, the greater the reduction in the cost of your car insurance.

Counting the cost of making a claim

This issue of NCB deductions – when the value of an NCB is slashed – came to our attention when a concerned customer contacted us via the comments section of our motoring blog.

She’d seen her eight year-NCB cut to just three after making a claim – a much bigger drop than she was expecting.

The customer wrote: “I am insured with Churchill, I have 8 years no claims. Unfortunately, I had an accident and Churchill informed me I would lose 2 years no claims and added that because they only consider 5 years they will be leaving me with 3 years no claims bonus.

“Surely this is wrong because when my renewal is up and I search elsewhere there ARE other insurance companies who consider 9+ years. Does anybody have any advice regarding this?"

How many years' NCB should be deducted?

If you make a claim on your car insurance, the industry norm is to deduct two years’ worth of NCB.

We contacted Churchill to check its position and whether the customer would, in effect, lose five years’ NCB following her claim.

A spokesperson said: “Churchill offers an 80% discount as an introductory offer for new customers who have eight years or more NCB, and we continue to reward up to nine years' NCB for existing customers who remain claim-free.

However, if a customer makes a claim and they have over five years' NCB this will be reduced to three years' NCB after a first claim."

Using this MoneySuperMarket tool, you can find out how the leading car insurance providers approach the subject.

How many no-claims discount years will my new insurer honour?

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Maximum number of NCD years

With most insurers, the size of discount you can achieve increases until you have built up five NCD years, at which point the maximum discount percentage is achieved. Despite this, some companies continue to recognise if you go further years without making a claim - but they don't increase the size of your discount (or at least not by much).

However, it can still be helpful. If your insurance company recognises up to, say, nine years of claims-free driving and you have an accident, you might lose two years and drop back to seven. As that's still higher than five, making a claim would not jeopardise your discount.

Other companies will always drop you back to three years after an accident, regardless of your number of years claims-free.

Maximum No Claims Discount

The amount of discount earned increases with each year of claim-free driving.

So after one year you might get 30%, with the percentage increasing each year until you get 70% NCD after five years.

Most firms offer a maximum NCD of 70%, although some offer 75% or 80%.

Does it have an Accelerated Bonus Scheme?

Some insurance companies offer drivers with no NCD an accelerated bonus scheme, which awards a year's NCD after 10 months claims-free driving.

After 10 months, you can either renew with the same firm, or move to another firm with the one-year bonus intact.

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Understand your no claims discount

Standard practice

This seemed excessive, so we got in touch with the Association of British Insurer (ABI), to find out if there is an industry standard when it comes to the allocation of NCB.

It turns out there isn’t, and it’s completely at the discretion of each insurer. Stephen Sobey from the ABI said: “The no claims bonus is a tool used differently by each insurer, there is no standard formula across the industry.

So we did some shopping around of our own, to find out how different insurer measure up against each other when it comes to deducting NCB, specifically in the case of our customer who had accumulated eight years’ NCB before making a claim.

The results were eye-opening to say the least…

How a claim affects your NCB

Insurer name

Maximum NCB considered

NCB deducted after claim

NCD applicable at renewal following one claim (after customer had accumulated eight years’NCB)

Admiral

6 years

2 years

3 years

Allianz

9 years

2 years

6 years

Aviva

15 years

2 years

3 years

Direct Line

9 years

2 years

3 years

LV

9 years

2 years

3 years (if customer has 9 years NCD it will be cut to 4)

More Th>n

9 years

2 years

3 years

Quote Me Happy

9 years

2 years

3 years

Saga

No limit

2 years

3 years

Swift Cover

6 years

2 years

4 years

Swinton was not able to answer our query as it said there were too many variables to be able to provide this level of detail.

Esure and Sheila’s Wheels don’t disclose their specific NCB scales while AA Insurance Services simply state that in the event of a claim : “Your No Claim Bonus will be reduced at renewal in accordance with the insurer’s ‘step back’ scale at the time of renewal (usually to the equivalent of 0, 1 or 2 years) subject to any No Claim Bonus Protection condition that may apply to this insurance.”

We also contacted Carrot, a telematics insurer, to see what its position was and were told this wasn’t really relevant to the average telematics customer.

This type of cover is aimed at younger drivers and once they have five years’ driving under their belt, it’s probably more cost-effective to move on to a traditional insurance policy. This is something I took a closer look at in the video below and in my article Putting telematics to the test.

So, how many years' NCB should be deducted?

In short, although it’s standard practice to deduct two years’ NCB after a claim, if you’ve accumulated over five years’ NCB in most cases this will be cut back to just three following a claim.

Just three of the insurers we contacted had a different policy – Allianz honour the two years no matter how many years’ you have accumulated, so our customer would have had six years' NCB at renewal, while Swiftcover has a sliding scale which means your NCB will be cut back to four years if you’ve accumulated six or more years’ NCB.

LV also puts customers with nine years’ NCB back to four should they make a claim.

Admiral also included an interesting caveat in its terms and conditions, where it stated: “This is a No Claims Bonus and not a no blame bonus. If a claim occurs which is not your fault and we have to make a payment, your No Claims Bonus will be reduced unless we can get back all that we paid from those responsible.”

So even if you make a claim for an accident that wasn’t your fault you’ll get your NCB cut unless a settlement can be reached with the guilty party’s insurers.

All of which throws the importance of NCB protection into sharper focus.

Is it worth protecting your NCB?

The common consensus is that protecting your NCB is only worthwhile up to a certain point and that, the longer you go with NCB protection but without making a claim, the less cost-effective it becomes. This is something I cover in more detail in my article Should you protect your no claims discount?

However, this works on the assumption that insurers will cut your NCB by just two years should you make a claim. But these latest findings show this is clearly not the case as, in most instances, you’ll be knocked back to just three years’ discount, regardless of the number of years of claim-free motoring you’ve accrued – and most insurers don’t apply the maximum discount until you have at least five years’ NCB.

How long is proof of no claims valid for?

Your proof of NCB is usually only valid for two years - so if you're off the road for any reason or don't have your own policy for more than two years, you'll have to start from scratch the next time you take out cover.

Kevin Pratt, insurance expert at MoneySuperMarket, said: “It’s often assumed insurers will deduct two years’ worth of NCB in the event of a claim, but it’s not that straightforward. The system operated by most insurers could have serious cost implications for motorists who have to make a claim.

“This means paying for NCB protection is an option customers should consider when shopping around for cover.

“It’s also important to remember that your NCB is portable, so you can still shop around to find the best insurance deal without having to worry that you might jeopardise your discount.”